Signs of a credit slowdown? Figures hint at an ease in borrowing appetite

Tuesday 2nd January 2018

Written by Martin Upton

Data on borrowing for November suggest that the trend line in demand for credit in the UK is downwards.

Figures produced by UK Credit show that the total number of mortgages taken out was 5% lower than in November 2016 and the lowest monthly total since August 2016.

The data do, though, contain some mixed messages. The financial value of the mortgages taken out in November was £13.9 billion – and this was 13% higher than in November 2016. So clearly the average size of mortgages taken out was much higher – some 19% higher – than a year earlier.

This is reflective of the continued growth in average property prices (up 2.5% in the year to November according to the Nationwide Building Society) and, perhaps, also an indication that borrowers are using mortgage debt to replace more expensive forms of borrowing.

UK Credit’s figures for November also show that credit card borrowing grew by 5.3% in the year to November – up from 5.0% a year ago. However the trend line in credit card borrowing appears to be downwards following the recent peak of 6.4% in the year to April 2017. This will come as a relief to the Bank of England’s Financial Policy Committee (FPC) which has expressed concerns of late about the growth in unsecured borrowing.

The driver for lower mortgage approvals could well have been the increase in Bank Rate from 0.25% to 0.5% in November. Fixed rate mortgages also became slightly more expensive during the month as the financial markets reacted to the start of a tightening cycle for monetary policy.

So what are the prospects for 2018? Will the demand for credit ease further? On balance the likelihood is that it will for three reasons. First, monetary policy is likely to be tightened further – albeit not dramatically. This will result in higher mortgage rates. Second, household finances will continue to be squeezed with low earnings inflation (which is expected to average between 1% and 2%) and higher household costs. Council Tax in England & wales is widely expected to see rises of up to 5% from April costing an average household some £100.

The third factor that will bear down on the demand for credit is the over-arching economic uncertainty that will pervade the economy in 2018 – Brexit. The unknown impact that Brexit will have on the UK economy seems set to at least make many households put major financial decisions on hold – and taking out a new mortgage obviously ranks as a major decision.

Sure the abolition of Stamp Duty Land Tax (SDLT) for properties up to £300,000 for first-time buyers, announced in the November Budget Statement, will provide some stimulus to mortgage demand. But this alone will not be able to counter the weighty economic pressures that seem set to reduce the UK’s appetite to borrow money.